General Dynamics Corp. and McDonnell Douglas Corp., the nation's two largest defense contractors, plan to sue the federal government for $3 billion, alleging that the Navy saddled the companies with an illegal contract on the now-canceled A-12 attack jet, the Los Angeles Times reports.

The two contractors will argue that the Navy knew that the $4.3 billion contract to develop the A-12 would be less than the anticipated cost, meaning that the two companies would sustain a significant loss, according to sources in the newspaper's story.

Although such fixed-price contracts -- common during the 1980s -- have evolved into a major financial burden for the defense industry, the A-12 suit will be the first effort to

prove that such arrangements were inherently illegal. It is expected to be filed on Friday.

The suit, to be filed in the U.S. Claims Court in Washington, would also represent the largest case ever brought by a defense contractor against the government. Historically, few have sued the government, though many have filed claims.

The suit was also expected to highlight the controversial involvement of former Secretary of the Navy John F. Lehman Jr. and his deputy, Melvyn R. Paisley, in setting the Navy's policy of using fixed-price contracts to develop new weapons.

The ill-fated A-12 development program was more than a year behind schedule and billions of dollars over its cost ceiling when the Navy canceled it last January under punitive terms known as "default." After the termination, the two companies laid off 9,000 workers across the country.

At the time, the Navy demanded repayment of $1.34 billion from the two companies, but the demand was deferred after concern arose that enforcing it could bankrupt General Dynamics and McDonnell Douglas during the Persian Gulf war, according to congressional testimony by Pentagon officials.

The suit will attempt to overturn the terms of the cancellation, thereby negating the repayment demand. It will also seek to recover additional funds the two companies spent prior to the termination.

The companies have already briefed senior Pentagon attorneys on the suit.

Spokesmen for General Dynamics and McDonnell Douglas, both based in St. Louis, declined to comment. Navy General Counsel Craig King also declined to comment.

The suit will allege that the contract was illegal from its inception and therefore never existed as a legal instrument, according to industry sources in the newspaper's story.

It will also assert that the Navy erred in signing a fixed-price contract without having the full $4.3 billion obligated to the program. The Navy had planned to use annual appropriations to fund the entire program, a mechanism the two contractors will contend is legally flawed.

Since the A-12 contract was awarded in the mid-1980s, the Pentagon has turned away from issuing fixed-price contracts to develop new-technology weapons. In March, Eleanor Spector, director of defense procurement, said in a speech that past policies of using such contracts had "proven to be mistaken."

Critics have said the use of fixed-price contracts to develop technology -- a policy championed by the outspoken Lehman and Paisley -- backfired on the Pentagon. In a number of cases, most notably the A-12, defense contractors were unable to complete programs when the costs exceeded contract ceilings.

One such critic, former Undersecretary of the Navy R. James Woolsey, faulted Lehman's management of procurement policy in an article in the journal, Proceedings.